Wells Fargo (NYSE:WFC) is already the biggest player in the U.S. mortgage market, but the company seems to have even greater ambitions. The company is actively expanding its commercial real-estate lending operation, with specific emphasis being placed on manufactured home community (MHC) financing.
Here's why the company is allocating more resources to this specialized form of commercial real estate, and what it could mean for the bank and its shareholders.
Wells Fargo's dominant MHC market share
After acquiring a $9 billion commercial loan portfolio from General Electric in April, Wells Fargo has more than $13 billion of MHC loans in its portfolio, a dominant market share. In fact, the No. 2 lender has less than one-fourth of this amount.
Including the GE acquisition, Wells Fargo has about $140 billion in commercial real estate (CRE) loans in its portfolio -- the leading share, but still just 8% of the total. So it's fair to say there's still room to grow.
In order to run the MHC lending business, Wells brought in two veterans from GE Capital, which indicates it plans to commit substantial resources to the continued expansion of its dominant position.
Why manufactured home communities?
Wells Fargo offers MHC financing via Fannie Mae DUS (delegated underwriting and servicing) programs. In other words, these loans are eligible for a government guarantee, similar to residential mortgages.
Typically, a MHC loan is for at least $2 million and comes with a three-year to 10-year loan term, amortized over 25 to 30 years. A loan-to-value ratio of 80% is required, but 75% is more common, and borrowers are charged fixed interest rates, which are based on current Treasury yields.
The properties MHC loans are backed by must meet some strict criteria, including (but not limited to):
- 50% of home sites must be able to accommodate double-wide homes.
- The property must offer market-competitive amenities.
- 85% of home sites must be occupied.
- The majority of the property cannot be located in a flood zone.
- The property must bring in more than enough money to service the debt.
The point of this discussion is that all of these factors make MHC lending very safe. In fact, Fannie Mae has no MHC loans in default or foreclosure, an extremely impressive statistic, considering that there are more than $34 billion in outstanding MHC loans.
Wells Fargo's historical focus on growing while keeping charge-off and default rates low, is why the company is so interested in expanding this part of its business. Further, Wells Fargo believes there's a lot of unmet demand for this type of financing, which makes it a great way for the bank to expand its CRE lending business in the tough low-interest environment.
It could mean more money for Wells
Wells Fargo's CEO called the company's acquisition of the commercial loans from GE a "once-in-a-generation event," so it's fair to say the company got a good deal, and it feels it can capitalize on its now-dominant MHC market share.
Wells Fargo's mortgage business is rather lucrative for the company, so further expansion could mean a nice boost to the bottom line. In addition to the interest income from its vast portfolio of mortgages, the company benefits from servicing fees, as well as origination fees for all of the mortgage loans it makes -- which, as I've said before, can be quite a lot of money.
Between the expansion of commercial real estate and the thriving residential mortgage market, Wells Fargo shareholders could see a greater-than-expected rise in earnings over the coming years. Not that shareholders needed it, but this is yet another reason to be optimistic about Wells Fargo's bright future.